Referral programmes also known as Word-of-Mouth marketing (WOM) have become a popular way to acquire customers. Yet, there is no evidence that customers acquired through such programs - referred customers for short - are more valuable than other customers. Customer referral programmes are a form of stimulated WOM that provide incentives to existing customers to bring in new customers. Referral programmes have three distinctive characteristics.

First, they are deliberately initiated, actively managed and continuously controlled by the firm, which is impossible or very difficult with organic WOM activities like spontaneous customer conversations and blogs. Second, the key idea is to use the social connections of existing customers with non-customers to convert the latter. Third, to make this conversion happen, the firm offers the existing customer a reward for bringing in new customers.

Whereas leveraging the social ties of customers with non-customers to acquire the latter is not unique to customer referral programmes, their three distinctive characteristics set them apart from other forms of network-based marketing. Unlike organic WOM, referral programmes are actively managed and monitored by the firm. Unlike most forms of buzz and viral marketing, the source of social influence is limited to existing customers rather than anyone who knows about the brand or event. Unlike multi-level marketing, existing customers get rewarded only for bringing in new customers. They do not perform any other sales function (e.g., hosting parties) and do not generate any income as a function of subsequent sales.
Consequently, referral programmes do not carry the stigma of exploiting social ties for mercantile purposes like multi-level marketing does. In most referral programmes, the reward is given regardless of how long the new referred customers stay with the firm.

According to a new study titled, “Referral Programs and Customer Value” (to be published in the January 2011 issue of the American Marketing Association’s Journal of Marketing), customer referral programmes are indeed a financially attractive way for firms to acquire new customers. The study — authored by Van den Bulte, Bernd Skiera and Philipp Schmitt, a professor and doctoral student, respectively, at Goethe-University in Frankfurt, Germany — was conducted over a period of three years and followed the customer referral program of a leading German bank (which remained anonymous) that paid customers 25 euro for bringing in a new customer.

This study addresses this gap and investigates to what extent referred customers are more profitable and more loyal. Using information from a database of 10,000 customers acquired by the bank in 2006 — about half of them through the institution’s referral programmes and the other half through traditional marketing efforts such as direct mail and advertising — the study tackled three questions:

* Do referred customers have higher margins than other customers?
* Do referred customers stay longer with the firm than other customers?
* Do referred customers have a higher customer lifetime value (CLV), the net present value of all the profits a customer generates over his or her entire association with the firm?

An analysis of customer activity from January 2006 until September 2008, a total of 33 months, showed that referred customers indeed generated higher margins than other customers. This difference was quite sizable at first, but eroded over time and came down to zero after about 1,000 days. The average value of a referred customer is at least 16% higher than that of a non-referred customer with similar demographics and time of acquisition. However, the size of the value differential varies across customer segments; therefore, firms should use a selective approach for their referral programs.

“As a customer, I know my bank better than non-customers do. I also know my friends better than my bank does,” Van den Bulte points out. “I have a better idea than my bank about which of my friends would be a good match for the bank, and vice versa. This is the better-matching argument: The existing customer knows both the bank and the prospect, and so has superior information to assess to what extent there is a good fit between the two. Using that information, I only refer prospects who I feel will match well with my bank.”

This “superior match” phenomenon explains why the margins documented at the beginning of the study were higher for the referred customer than for the customer acquired through traditional marketing efforts. Well-matched customers simply generate more revenue at a lower cost to the firm.

Many practitioners, including managers of the bank who made the data available, fear that referral programs suffer from “moral hazard,” where opportunistic customers bring in “deadbeats and other unprofitable new customers just to earn a referral fee,” Van den Bulte states. However, the study shows that the benefits of a customer referral program can outweigh such negatives, making the programmes pay off financially.

However, there are concerns that WOM stimulated by the firm may be substantially less effective than organic WOM in generating valuable customers : (i) targeted prospects may be suspicious of stimulated WOM efforts; (ii) such efforts often involve a monetary reward for the referrer who as a result may seem less trustworthy; (iii) programs providing economic benefits tend not to be very sustainable ; (iv) unlike organic WOM, stimulated WOM is not free, raising questions about cost-effectiveness; and (v) stimulated WOM is prone to abuse by opportunistic referrers.

Why does a study on the financial benefits of customer referral programs make sense now? The recent trend toward viral or social marketing is one reason, but Van den Bulte notes that there is also a general belief that the ROI on traditional marketing has been decreasing. Consequently, companies feel that something must be done to “get a bigger bang for our marketing dollars.” This in turn has put marketers under pressure to quantify the return on their expenditures. “Marketing accountability is a major trend nowadays. One of the appeals of using a customer referral program is that you know exactly how much you put into it and, as our study shows, you can also calculate how much you’re getting out of it.”

This study goes a long way to address the uncertainty about the benefits of stimulated WOM in customer acquisition for managers facing demands to increase their marketing ROI and wondering whether or not to use this method. Small businesses have always used organic WOM to grow their businesses and they will continue to do so, says Karl Smith, founder of Business Networking South Africa. Smith concurs that stimulated WOM can erode trust if the referrers are not transparent in referring their networks for a referral fee. “If I say that I trust you, I say that I know that you will act in my best interest. It’s that simple!” says Smith. “If you simply refer me to a service provider for a fee without taking into consideration my needs, aspirations and values then you are not acting in my best interest. Can I really trust you?”

Copyright 2010 by Karl Smith
This article may be copied or republished with the following credit:
“By Karl Smith, Business Networking and Referral Coach, Cape Town, South Africa. +27 (0) 71 444 2210 karl@businessnetworkingsouthafrica.co.za “ www@businessnetworkingsouthafrica.co.za ”

Most organisations waste so much intellectual property and knowledge possessed by their people who work there. Why is this? It is simply because organisations tend to work in silos. If people build relationships more freely and this can only be done by a change in strategy by the management, then this waste of intellectual property can be reduced dramatically. In addition to wasted cerebral resource there are so many opportunities lost for multi-service firms and companies to cross sell to existing clients. The simple reason is people are comfortable promoting their own expertise but feel totally uncomfortable promoting others. They don’t really understand what other people do and in bigger organisations often wouldn’t even know who to recommend if they did.

When people hear “Networking” most immediately think of attending external activities; Chamber events, membership meetings and black tie events. Rarely do professionals consider the importance of Internal Networking with those inside their own office walls. Yet, every leader, manager and employee within an organisation represents their own network of endless relationships simply waiting to be discovered. Additionally, business developers and salespeople are increasingly understanding the power of networking, but few bother to network with the people inside their company.

So what the internal networking? Internal networking is building informal relationships between individuals within an organisation. The purpose of the relationships are for seeking help, advice and support. It is a way to increase the impact of each worker’s duties in the organisation, as well as increasing resources for the individual. The more people that the worker is able to communicate with in the organisation; the more information the worker has access to; the more influence the worker may have.

Being an internal networker means you are looking outside your immediate, day-to-day activities and thinking about how you can connect with and create value for others in your company. Many of the same principles apply for both external and internal networking, but there’s a nuance to the internal process that’s unique.

Where Do I Start? The answer is directly linked to why we network. Take a moment to FOCUS and perhaps the best way to do that is by asking yourself the following questions. “What would make my job easier?” or “How can I better support my own goals and/or the goals of my employer or company?” Reflect on some of the following answers and see if you might have similar responses:

“My job would be easier if I could…
• achieve better internal co-operation with other departments.”
• find suppliers who have excellent service standards and competitive prices.”
• be more “in the loop” relative to leading edge technology.”
• quickly source highly qualified employees.
• gain easier access to key decision makers.”

Develop Trust. Knowing is one thing, trust is something completely different. For internal networking to be successful, you must be able to answer the following questions:
• Who can I trust to help me on an important company matter?
• Who can I trust to refer an important client?
• Who can I trust to be a mentor?
• Who can I trust to succeed me when it is time to move on?

Developing trust requires time, energy and a degree of personal risk. It requires connecting with people one on one. It requires sharing one’s own background and stories and showing interest in others. It requires being vulnerable, opening up to others and being real. In today’s hyper competitive landscape, those organisations that embrace and understand the power of internal relationships unleash an incredible force to enhance teamwork, reduce turnover and most importantly expand a company’s circle of influence! Thus, companies should take time to foster internal networking. However, many do not and therefore they do not take advantage of the significant personal connections that can be made by internal networking.

Copyright 2010 by Karl Smith.This article may be copied or republished with the following credit:
“By Karl Smith, fouder of Business Networking South Africa +27 (0) 071 444 2210 karl@businessnetworkingsouthafrica.co.za “ www@businessnetworkingsouthafrica.co.za

Karl’s clients love his highly interactive, motivational, pragmatic and motivational courses and presentations. Book Karl to speak at your conference or to do in-company training today! Have a look at the topics:

• Leverage The Power of Business Networking for Professional and Personal Success
• The Power of The Brand Me Inc
• Relationships for Leadership and Management Success
• Endless Referrals: Building A Referral-Based Business
• Relationships for Stakeholder Management
• Repositioning Yourself For Personal Excellence: Fly With The Eagles
• Networking in a Culturally Diverse Organisation: Enhance Performance, Deliver Results, and Optimise Your Opportunities.
• Authentic Leadership: It is becoming increasingly obvious that new leadership is required in the 21st century to tackle the urgent challenges we face in government, business or public service.

2010 is here (and many are glad that 2009 is over!), and it’s time to focus on the future. Has 2009 been the year networking has grown up in South Africa? There certainly seem to have been more changes in the last 24 months than any comparable period in the last decade.

Before, very few businesses were aware of networking as a formal way of developing a business or to build in-company or stakeholder relationships. Chambers of Commerce and the AHI ran popular events; meanwhile, Business Network International (BNI), the world’s largest networking organisation was well established in this country, encouraging people to be aware of the virtues of getting out of bed before 7am to do business. Beyond Chambers of Commerce events, the AHI and a few independent groups, networking had a very low profile. During recent years the cocktail function image of networking has devalued its effectiveness to schmoozing. Today we are operating in The Network Economy and it will underpin the global business environment for years to come. Networks will provide unsolicited benevolence which brands will not understand and trust is emerging as the defining characteristic (asset) in this economy. For instance, having cohesive face-to-face networks made employees in one organisation 30% more productive, says MIT researcher Alex Pentland. Having extensive personal digital networks resulted in only a 7% productivity increase. (”How Social Networks Network Best,” Harvard Business Review, February 2009). To make a bigger difference in your business or to seize opportunities you will have to collaborate with others. But what are the networking trends for Africa in general and South Africa in particular?

1. Firstly, there seems to be consensus amongst economic commentators that the economy IS going to improve. This isn’t a “networking” issue, but it IS important. Have faith. Look for opportunities, especially relationships that can be established around the 2010 FIFA Soccer World Cup. Remember that the world is coming to Africa and the rest of Africa is coming to South Africa. The recession has highlighted that relationships (not just client numbers or contacts) are crucial to stay in business or to find a job. Focus on what you do best. You will have a better year, but you need to focus on solutions.

2. Online social networks will continue to be the buzz words and it will grow in prominence. However, consider this . . . digital schmoozing will continue to cause frustration over which forums to join and how to convert that technology into viable business opportunities. To successfully leverage your social networks you need to really be active in your communities, ergo it is best to have power accounts on a few social media sites rather then trying to manage many of them across multiple networks. Find your niche. Educate your on-line networking members on how to leverage the forum otherwise it will just be another virtual listing of a profile.

This is an emerging field, and much of it will be established over the next few years. In considering joining groups think about your overall strategy for personal and business success. Many web developers will seek to become experts in this arena as clients will expect them to be authorities in this arena. Be careful. Do research before you dig into your pockets and request success stories. Go as far as contacting references.

3. Companies, small and large, need to create a social media strategy. Social media is here to stay. The best way to define social media is to break it down. Media is an instrument of communication, like a newspaper or a radio, so social media would be a social instrument of communication. A new study from the Marketing Executives Networking Group reveals most marketers are still in the early or experimental phases of adopting and measuring social media.

Like many other skills, the only real way to effectively apply a new strategy is to get the knowledge and just do it. What’s your plan? Oh . . . you don’t have one? Big mistake in 2010. Don’t know where to start? Do a little research. Begin with the End in Mind. Strategy isn’t the goal. It’s the path you plan to take to get there. Before we go too far down any one path, we should ask some questions:

What are your personal and business goals? Are your customers likely to be online? Note that many people are online these days, but it might be that you have a product or service that isn’t as frequently purchased via the web. What’s your story? Are you ready to handle negativity? Platforms like blogs and videos allow for negative comments, and some company cultures aren’t ready to engage with those opinions. How will engaging users via social media integrate into your overall marketing/communications/research/knowledge strategy? How will you incorporate this into people’s daily jobs? How will you measure results? How long are you willing to give it a try? What’s your willingness to experiment, take risks, and adjust your plans? If you know of any good experts out there who can help in this area, then please let me know.

4. Word-of-mouth. Despite impressive growth in the business, word-of-mouth will continue to be used mainly by most small business. Why? They don’t have the marketing and other resources to increase market share for various reasons. Most large corporations will continue to ignore the total cost (human resources: recruitment, selection and training + marketing + other opportunity costs) to business as they underrate the influencing power of individuals among their networks. I encourage you to invest in networking training so that you can reap the full benefits of networking as a business skill.

5. Victims of retrenchment will become active in networking groups (both face-to-face and online). Many people have lost their jobs. A number of business networking organisations have noted that within a few months of an increase in unemployment rates, there is almost always an influx of new members into networking organisations. I have also seen a surge in the formation of new networking groups in South Africa and a number of individuals from other African countries have interacted with me to provide guidance in starting networking forums. I am confident that networking organisations will continue to experience an influx of new members in 2010. What is their challenge? Read point 9 below!

6. Women will lead the way. The business landscape has now changed dramatically and more women are starting businesses and occupying positions of power. Based on the audiences addressed to date and my current clientele more women (entrepreneurs, managers and leaders) will invest in networking (business relationship building) education because they understand that it is highly prized business and professional competency. Read point 9 below for more about my predications for women in networking.

7. We will begin to see more of an interface between face-to-face and online networking opportunities. Online networks will do things to promote face-to-face opportunities, and face-to-face networks will begin to integrate online networking more effectively into their programmes.

8. We will see the slow death of the “one-way” website. I told my web developer a while ago that I don’t have a website - I have an information tool, a business resource, a communication and marketing tool. As business owners get to grips with social media and online networking more and more, companies will create websites that operate in two directions. They will not only provide information to their customers but will also seek feedback from their customers. Blogs, interactive newsletters, social network sites, consumer feedback groups . . . all of these will continue to grow in importance for companies.

9. Face-to-face networks (networking organisations) will continue to grow, IF they stay true to a fundamental mission of helping people growing their businesses. If they use it for marketing or to make money, then it will die a quick death. I am predicting comfortably that more women networking organisations will be formed, magazines and other services providers focusing on women clientele will incorporate networking (online and off-line) as a product, marketing or information sharing forum. I am encouraging owners of independent women networking forums to cooperate because therein lies the power of authentic networking.

10. A strong network of professional contacts will become vital. Professional network is a term that describes the professional contacts a businessperson or professional may have. Industry bodies, member associations, professional organisations will be challenged to address the needs of value-driven members. Why? Value-driven members seek support and benefits from their perspectives based on their realities. I predict that these organisations will put a greater emphasis on “networking” as a value proposition. However, they will face competition in attracting and retaining members because of the increase in the variety alternative networking forums.

Don’t wait on your organisation! Begin by constructing a database of members and other people you already know who might assist you. Concurrently, think carefully about the value each of these individuals brings to your networking group. You must be committed. You aren’t networking if you’re out for instant gratification. Remember “networking” is a professional and business competency…most people are not natural born networkers but they can acquire this vital skill.

11. Relationship building skills will accelerate as a requirement for job seekers or if you want to climb the corporate ladder. Top executives such as Chief Financial Officers, Chief Information Officers, Board members etc are now required to proactively create and nurture relationships to help the business to uncover the best opportunities. More and more positions advertised in printed and other media will mention requirements such as “the ability to network”, “must have a strong network”, “the ability to influence others” “relationship building” etc. A large section of the generation that grew up during the techno era will be in sales, leadership, management and other positions where they must interact and influence people. They will face many people challenges and Africa will have a dire shortage of relationship building skills.

12. Companies that succeed in 2010 will remain agile and will focus on relationships. Technology is a tool. Relationships are king when it comes to networking. Companies who are creative in using tools to enhance the relationship building process will be the leaders in a company networking programme. More leaders, managers, entrepreneurs, business developers will invest in relationship building because they understand that all successful people have one thing in common - they understand that networking is nothing else but relationship building. Private Bankers and Financial Planners must note that relationships will distinguish them in a highly competitive market! Don’t be surprised if you see big corporates and other organisations re-opening local branch offices again!

13. Networking isn’t the best way to job hunt. It IS the job hunt and job placement competency. If you’re in a job search, you know that networking is by far the most effective way to find what you are seeking - and that even applies to getting noticed by a recruiter. Fellow networking expert Anne Baber was doing a workshop for job hunters, she asked, “How many of you spend more time on-line than on face-to-face networking?” Most of the 80+ attendees raised their hands. Oops! Only 7% of jobs are found through the internet; more than 68% of jobs are found through networking. I predict that face-to-face networking will remain the most effective tool to find a job and the most cost effective tool to find the right candidate for the right position at the right company.

Do you know how ready your network is to help you to find a job? Answer “Yes” to the following 5 questions test their readiness.

1. I attend at least 75% of the activities/events/programs of my professional association and take a visible role.

2. I am in touch with 10 key contacts regularly to update them on my successes (and to find out about theirs).

3. I’ve reached out in the last month to build a relationship with several people who are outside my regular circles.
4. When someone I know is laid off, I immediately get in touch and focus on learning as much as I can about that person’s expertise, so I can refer him/her to my contacts.

5. I’ve identified twelve organisations that hire people with my expertise and am talking with others in my network to find contacts in those organizations.

As you talk with a contact, ask, “How would you describe what I do?” The person who can give a vivid, accurate example of what you’re good at, is a valuable contact and more likely to pass opportunities along to you. So, continue to update contacts with stories about your recent successes and accomplishments.

Well, there it is. Those are my predictions for 2010…and beyond - say 5 years. What do you think of these ideas AND what, if anything, would you add to these business networking predictions? To comment on this article , send me a networking or referral question, share a tip that works for you, tell me about other referral success, or suggest topics for future Networking/Referral Minutes, send an email to me at karl@businessnetworkingsouthfrica.co.za

Copyright 2010 by Karl Smith
This article may be copied or republished with the following credit: ” Adapted from www.NetworkingNowBlog.com by Karl Smith, Author: Beyond The Business Handshake: Dare To Build High-Trust Business Relationships” www.businessnetworkingsouthafrica.co.za karl@businessnetworkingsouthafrica.co.za

“Very impressive , demanding and straight to the point. Focus on reality and what is to be instilled in all great managers, excellent Karl, worth the time”

My new keynote “Relationships for Leadership and Management Success” launched in Cape Town last month received accolades. Most of the feedback underlined the “passion” the audience has experienced during this presentation. Why was I able to speak with passion in offering them a step-by-step process to build profitable relationships? The answer is simple! I have burnt my fingers because of my fundamental belief that people are worthy of trust. I remain convinced that all people are worthy of trust but I learned one needs to be aware of understanding the kind of person you are dealing with and looking at their track record before you just jump into the relationship. Stephen M.R Covey calls it a balance between your ability to analyse risk -good business judgment- and good people judgment - including instinct and intuition. Allow me to focus my attention on “trust and micro-management”. I have always been an opponent to micro-management because micro-managers can only take their companies as far as they themselves take them. They run the risk of driving away their best and most talented people.

In business management, micro-management is a management style where a manager closely observes or controls the work of his or her subordinates or employees. Micro managing may make you feel in control but in reality you are only hurting yourself and the company. It only limits an employee’s ability to be innovative and creative.

Signs of micro-management: What follows are some signs that you might be a micro-manager - or have one on your hands. In general, micro-managers:
• Resist delegating;
• Immerse themselves in overseeing the projects of others;
• Start by correcting tiny details instead of looking at the big picture;
• Take back delegated work before it is finished if they find a mistake in it; and
• Discourage others from making decisions without consulting them.

When a manager, director or other executive tries to micro manage every person and every project, productivity is lost. There is simply no way around it. An effective manager is responsible for multiple projects and many people. When he tries to exert too much influence over too many things, he can’t help but to lose focus on the bigger picture. As attention becomes focused on one aspect of the business, the inter- relationships and integration of projects become lost in the fog, or worse, on-going complementary projects are changed, and forced to fit with the project the manager is detailing. The higher the level of management, the more dangerous this becomes. If a CEO or COO becomes obsessed with production issues, he may loosen his grasp on things like sales and marketing or operations. By the time he fixes the production issue the point has become moot because sales have dried up. .

So now you’ve identified micro-managerial tendencies and seen why they’re bad. What can you do if you know you’re exhibiting such behaviours - the best way to build healthier relationships with employees may be the most direct: Talk to them. It might take several conversations to convince them that you’re serious about change. Getting frank feedback from employees is the hard part. This means giving your employees the leeway, encouragement – and resources to succeed. Focus first on the ones with the most potential, and learn to delegate effectively to them. If you lack trust in your employees remember the statement - “Employees won’t start trusting you until you start trusting them”.

Why don’t you drop me a mail via karl@businessnetworkingsouthafrica.co.za to tell me about your challenge to build trust?